MADISON, Wis. – In a test-case long in the planning, Community First CU filed suit in federal court here yesterday challenging the Internal Revenue Services assessment of the unrelated business income tax.
The $920 million credit union is asking the court to order the IRS to refund the $54,600 in UBIT it paid last year on income from the sale of credit life and credit disability insurance, and guaranteed auto protection insurance, and to declare the products exempt from UBIT.
"The products at issue here are financial services, and they contribute to the financial stability of the credit union and our members," said Catherine Tierney, president of the Appleton, Wis., credit union. "They are well within the purpose of credit unions and should not be taxable."
The stakes are enormous for credit unions, the vast majority of which sell credit life or GAP insurance and earn millions of dollars in income on the products.
State chartered credit unions have been fighting with the IRS for three decades over what is taxable under UBIT, which is assessed on income for activities not considered integral to the main purpose of a credit union, deposit-taking and lending. Federal charters do not pay UBIT because the Federal CU Act defines them as instrumentalities of the federal government.
The suit was organized by CUNA, NASCUS, the American Association of CU Leagues and CUNA Mutual, which have coordinated the fight with the IRS for years. The groups plans to have another credit union file a UBIT challenge in another jurisdiction in the coming months.
